Urban Planning: It’s A Cultural Problem

Many New Zealanders are now aware that our cities
need to deal with serious structural issues, but may not
have a particularly clear understanding of the linkages of
the major issues, and most importantly, the common
cause.

Firstly – our poor housing affordability
performance is illustrated year after year by the Annual Demographia International Housing
Affordability Surveys , where currently our major cities
housing is approximately 5.7 times annual gross household
income. House prices should not exceed 3 times annual
household income, with mortgage debt loads not exceeding 2.5
times annual household income.

“For
metropolitan areas to rate as ‘affordable’ and ensure
that housing bubbles are not triggered, housing should not
exceed 3 times gross annual household incomes. To allow this
to occur, new starter housing of an acceptable quality to
the purchasers, with associated commercial and industrial
development, must be allowed to be provided on the urban
fringes at 2.5 times the gross annual median household
income of that urban market. The fringe is the only supply
or inflation vent for an urban market. The critically
important Development Ratios for the new fringe starter
housing should be 17 – 23% serviced lot / section cost –
the balance the actual housing construction. Ideally through
a normal building cycle, the Median Multiple should move
from a Floor Multiple of 2.3 through a Swing Multiple of 2.5
to a Ceiling Multiple of 2.7 – to ensure maximum stability
and optimal medium and long term performance of the
residential construction sector.”

One would think
something as simple as this would be easily understood.

In
rough terms, New Zealand housing is artificially inflated to
the tune of in excess of $250 billion and Kiwi households
are likely carrying $60 billion of excessive household
debt.

Most New Zealand households should not be taking on
board mortgages exceeding $150,000. They have essentially
been conned - or more likely conned themselves - in to the
idea that mortgages of $250,000, $350,000 plus are good for
them. In reality though, they are “mortgage slaves” and
the only real beneficiaries of excessive mortgages is the
banking community.

Secondly –
as the Auckland architect Kevin Clarke within his recent New
Zealand Herald article Govt can't escape leaky homes blame
explained so ably “The leaky building epidemic did not
happen by accident. It was primarily caused by government
mismanagement over more than a decade”. John McCrone
of The Press wrote at much the same time - “There’s a
storm coming” of these issues as they relate to
Christchurch, updated from his earlier article A rotten shame .

It’s worth considering why we don’t
have a “leaky boat” problem in New Zealand.

Thirdly
– New Zealand’s leading business website interest co nz
provides an updated list of Finance industry failures in New Zealand
. By last count, there are 48 that have gone to the wall in
the past few years, with $6.192 billion impaired, involving
187,519 deposits.

Now we are in to the “blame game”,
with requests for government support from those who were
more than happy to support the bubble pricing, load
themselves up with excessive mortgages, buy houses on the
strength of a bit of government paper and pile their life
savings in to companies they didn’t have a clue
about.

These same people need to be asked – how much
concern did you show for the young, poor and disadvantaged
denied the opportunity of affordable housing, while these
housing bubbles were inflating?

Most seasoned property
people could see all this playing out years ago and took the
appropriate steps to protect themselves – and more
importantly, their customers and those they deal with. In
the writers case, I shut down the development business mid
2004, and to keep occupied in the meantime, have engaged in
political advocacy work to deal with these problems. If
nothing else, it’s a better idea than going broke as a
“bubble bunny” developer.

The reality is that bubble
property markets are simply lethal, and as a seasoned
development practitioner, I will attempt to explain
why.

There is a saying in the property game that
“property is only worth the underlying income supporting
it”. Forget that and you are a dead duck.

If the
pricing moves outside the norm (price to income ratio –
with the affordable housing market definition provided
above), it is in to inflated price territory and these
distortions have costs and consequences.

Experienced
developers and builders know that while a bubble is
inflating, they are likely losing money as their cash dries
up. This is because as they are forced to pay higher land
and construction costs for new projects and tax on their
previous projects, before long, they run out of cash. In
essence, the taxable profits on the previous project are an
illusion. They are in reality going broke, developing poor
quality stock and dragging their financiers and unwitting
depositors in to the hole as well.

Those that do manage to
“hold on” will then likely go broke as the bubble
collapses and they and their financiers are left carrying
inflated land and property stock.

What was once
a disciplined commercial culture becomes a political cowboy
culture.

As property prices are artificially inflating,
land and building costs inflate and performance declines as
I explained within an article two years ago How Urban Planning Degrades Housing
Productivity. We are currently paying near double per
square metre build costs because of this, the British, near
four times as much as they should be. The British have had
60 years of poor quality land use governance and destructive
prescriptive planning, while here in New Zealand, it has
been going on for near 30 years.

In poorly governed and
regulated markets, property development degenerates in to a
political circus, to the extent it begins to feel to
development practitioners like a criminal activity!

As a
commercial property developer, I found that near 80% of my
time was spent on political and regulatory matters. Of the
30 years I have been in the development business, I would
estimate only some 5 to 6 years has been engaged on actual
development work. The rest of the time has been spent
“playing politics” and navigating ones way through the
haze of unpredictable, unnecessarily time wasting and
confused bureaucratic fog.

The first Demographia Housing
Survey released early 2005 illustrated these problems (with
constant annual repetition), but the Labour Government for
near four years through to late 2008 chose to ignore these
important Survey’s. After all, the bubble property markets
were generating excess bubble revenues for the Government.
To add insult to injury, the then Finance Minister Michael
Cullen delighted in telling New Zealanders of his illusory
financial management skills.

California was really the
“Cullen model”.

It was in large measure thanks to the
socially responsible New Zealand Planning Institute supporting
the Demographia Survey (please note – not the New
Zealand Bankers Association) back in early 2007, that
stimulated the then National Party Opposition to take up
these issues. The National Party’s Housing Spokesman Phil
Heatley at the time completed an overseas Study Tour and
initiated the Commerce Committee Housing Affordability
Inquiry.

Soon after the new National led Coalition
Government was formed November 2008 and the 5th Annual
Demographia Housing Survey released late January 2009, the
then Housing Minister Phil Heatley made it clear the new Government
intended to deal with these issues.

Now - within a few
weeks, the Environment Minister Nick Smiths Urban Technical Advisory Groups (writers comments) report is to be
released. Hopefully, this report will provide the foundation
for real progress to start on getting sound governance and
responsible regulatory administration in place.

It is
important to recognize however, that our Government and
public bureaucracies at all levels are a reflection of us.
If these serious problems are to be solved, it will require
the active, informed and responsible participation of
industry and professional groups in particular and each and
every one of us as
citizens.

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